ECON 2106
Utility: the satisfaction or benefit a person receives from consumption
Utility is:
Economists do note measure utility directly; we infer it from choices
Marginal utility: the additional satisfaction from one more unit of a good
Law of diminishing marginal utility: As consumption increases, marginal utility decreases
Utility increases with consumption, but at a decreasing rate
Because water is abundant, its marginal utility is low
Because diamonds are scarce, their marginal utility is high
Three reinforcing forces:
Individuals continue consuming until:
\[ \text{Marginal Utility} = \text{Price} \]
A change in any of the following shifts the entire demand curve:
A change in any of the following shifts the entire demand curve:
Bartsch (2026)
A change in any of the following shifts the entire demand curve:
Chopra, Roth, and Wohlfart (2025)
Demand: the entire relationship between price and quantity
\[ Q(P) = a - bP \]
Quantity demanded: the specific quantity at a given price
\[ Q(P_1) = a - bP_1 \]
A change in price causes:
Price Elasticity of Demand: measures how responsive quantity demanded is to a change in price
Visually:
Interpretation:
Bernard et al. (2025)
A change in any of the following shifts the entire supply curve:
A change in any of the following shifts the entire supply curve:
Price Elasticity of Supply: Measures how responsive quantity supplied is to a change in price
Visually:
Interpretation:
The primary determinant is time.
The Supply & Demand model is a partial equilibrium (PE) model
It focuses on one market at a time
The interaction of supply and demand determines market price
The equilibrium price is the price at which:
\[ Q_D = Q_S \]
It is called “equilibrium” because competitive forces eliminate imbalances
Jevons Paradox: When technological improvements make a good or service cheaper or more efficient, total usage can increase — not decrease.
Efficiency ↓ cost of use
Originally observed in coal:
When expanding supply lowers the cost of use, quantity demanded increases — often offsetting the intended benefit.
Transportation example:
Empirical evidence: Goodwin (1996)
Duranton and Turner (2011)
| P | Q | |
|---|---|---|
| S \(\uparrow\) | ||
| S \(\downarrow\) | ||
| D \(\uparrow\) | ||
| D \(\downarrow\) |
| P | Q | |
|---|---|---|
| S \(\uparrow\) | \(\downarrow\) | \(\uparrow\) |
| S \(\downarrow\) | \(\uparrow\) | \(\downarrow\) |
| D \(\uparrow\) | \(\uparrow\) | \(\uparrow\) |
| D \(\downarrow\) | \(\downarrow\) | \(\downarrow\) |
| P | Q | |
|---|---|---|
| S \(\uparrow\); D \(\uparrow\) | ||
| S \(\uparrow\); D \(\downarrow\) | ||
| S \(\downarrow\); D \(\uparrow\) | ||
| S \(\downarrow\); D \(\downarrow\) |
| P | Q | |
|---|---|---|
| S \(\uparrow\); D \(\uparrow\) | ¯\_(ツ)_/¯ | \(\uparrow\) |
| S \(\uparrow\); D \(\downarrow\) | \(\downarrow\) | ¯\_(ツ)_/¯ |
| S \(\downarrow\); D \(\uparrow\) | \(\uparrow\) | ¯\_(ツ)_/¯ |
| S \(\downarrow\); D \(\downarrow\) | ¯\_(ツ)_/¯ | \(\downarrow\) |
Howard, Wang, and Zhang (2024)
Prices emerge from the voluntary interactions of buyers and sellers
They allocate scarce resources:
No central authority decides:
Hayek (1945)
So far, we have focused on the allocative benefits of free markets.
A free market is an economic system in which prices are determined by voluntary exchange between buyers and sellers, without external restrictions.
In reality, many markets operate under artificial price restrictions, such as:
Lordan and Neumark (2018)
Clemens, Edwards, and Meer (2025)
Burkhauser, McNichols, and Sabia (2025)
Sabia and Burkhauser (2010)
Consumer Surplus = the difference between what consumers are willing to pay and what they actually pay.
Producer Surplus = the difference between what producers receive and their minimum acceptable price.
When price controls are binding:
Diamond, McQuade, and Qian (2019)
Coulson et al. (2025)
“[The results]… imply that rent-controlled housing has depreciated faster than other rental housing” (Randolph 1988)
“Rent control results in]… the deterioration and removal of dwellings from the rental stock” (Murray et al. 1991)
“In Manhattan, we found that there was almost a 9% higher probability of an older and smaller building being in unsound condition if its units were rent controlled versus uncontrolled” (Gyourko and Linneman 1990)
“Sex workers have historically faced harm from clients. However, sex workers have claimed that internet platforms, such as Craigslist erotic services (ERS), reduced that violence. Using the staggered rollout of ERS for identification, we find that it is likely that ERS reduced female homicides by between 12 and 18 percent and … [sexual assault] offenses by between 7 and 9 percent. We hypothesize that this was due to more transactions occurring indoors, better screening efforts, and more efficient matching. Our results suggest that some internet platforms may mitigate the historical risks sex workers have faced.” (Cunningham, DeAngelo, and Tripp 2024)